2020 (2) TMI 421 - AT - Income Tax

Addition on sales to sister concerns on a selective picking of data and representing the difference between cost and selling price - HELD THAT - Mere surmises and conjectures that the assessees had underpriced the sales value cannot be the basis for a pre-determined approach without bringing any third party transactions on record by the Assessing Officer. The available documentary evidences in the form of purchase invoice, sales invoice, various bills and vouchers have not been found defective by the Assessing Officer at any point of time. When the quantitative details certified by the statutory authorities which are also part of the record subject to scrutiny by the Assessing Officer have not been rejected by him, then the Assessing Officer cannot presume that the assesses had suppressed the profits. It is not the case of the Assessing Officer that there were any material defects noticed at the time of examination of the books of account and also that there was no change in the method of accounting adopted by the assessees from what was regularly adopted. Accordingly, we are of the opinion that the Assessing Officer cannot blow hot and cold at the same time and onus clearly lies on the Assessing Officer to prove that the books of account maintained by the assessees suffers any defects. In the absence of any documentary evidence indicating any lapse on the part of the assessees in maintenance of books of account which were subjected to audit by the statutory authorities, we are of the opinion that the additions made by the Assessing Officer to the profits of the assessees only on the basis of surmises and conjectures of low profits on account of higher cost of production and sales price charged by the assessees sister concerns cannot stand the test of law leave alone the Assessing Officer s own logic - basis adopted by the Assessing Officer for making additions towards lower profits cannot be sustained. Addition under business head ' on the pretext that there was an 'apparent loss' on alleged policy of underselling in which event there was an apparent gain in the books of sister concern(s) - Any addition under the head income from business becomes revenue neutral in nature since any addition towards underselling in the hands of the assessee becomes a corresponding deduction for purchase in the hands of sister concern(s), as held by the Supreme Court in the case of CIT vs. Glaxo Smithkline Asia (P) Ltd. 2010 (10) TMI 21 - SUPREME COURT . When this judgment was brought to his notice by filing a copy, the Assessing Officer took a dramatic U turn to hold that units were independent. This action of the A.O. is unjustified. Hence, the addition on account of underpricing was not warranted. The assessing officer missed the vital point that income was below taxable limit after b/f losses were set off during the current year. Moreover, there was no finding by the lower authorities that sister concerns benefited in any manner. Being so, in our opinion, these cannot be any additions towards low selling price charged to sister concerns. Interest u/s. 244A - HELD THAT - We do not find any infirmity in the finding of the CIT(A) that the interest on Income tax refund assessable under the head other sources is to be taxed in the year in which the right to such refund had been recognized by an order or the date on which it is actually received by placing reliance on the decision of the Tribunal in the case of DCIT vs. Seshasayee Papers and Bonds Ltd. 2009 (3) TMI 901 - ITAT CHENNAI wherein it was decided that it has to be taxed in the year of actual receipt. Being so, we dismiss this ground of appeal of the assessee

Issues Involved:
1. Sustaining arbitrary addition on sales to sister concerns.
2. Failure to establish diversion of profit to sister concerns.
3. Allegation of policy to sell below cost.
4. Allegation of planned device to reduce tax incidence.
5. Revenue neutrality of alleged underpricing.
6. Acceptance of trading results by the Sales Tax Department.
7. Charging of interest under section 244A of the Act.

Detailed Analysis:

1. Sustaining Arbitrary Addition on Sales to Sister Concerns:
The assessees argued that the CIT(A) erred in sustaining the addition on sales to sister concerns, which was based on selective data and the difference between cost and selling price. The CIT(A) concluded that transactions with sister concerns were not genuine or bonafide, resulting in a loss on the sale of cashew kernels amounting to ?89,76,885/-. The assessees contended that the transactions followed the Arms Length Price (ALP), with pricing corresponding to the weighted average market price of direct exports, which had been accepted by the Department in previous years.

2. Failure to Establish Diversion of Profit to Sister Concerns:
The CIT(A) concluded that the appellant failed to discharge the onus of proving no diversion of profit to sister concerns to enable them to enjoy tax exemptions. The CIT(A) observed that the onus to establish the genuineness of the transaction lies with the assessee, especially when the transactions result in a loss and involve sister concerns enjoying tax exemptions. The CIT(A) noted that the sale prices were much below the domestic rates and the assessee did not claim any export benefits on sales to sister concerns.

3. Allegation of Policy to Sell Below Cost:
The AO alleged that the assessee had a policy to sell below cost, which was not substantiated by any concrete evidence. The CIT(A) observed that the higher grades were sold to sister concerns at prices above cost, but the lower grades were sold below cost. The CIT(A) noted that the assessee had not satisfactorily explained the business expediency for the pricing policy to sell below cost.

4. Allegation of Planned Device to Reduce Tax Incidence:
The AO and CIT(A) alleged that the sales to sister concerns were a planned device to reduce tax incidence, which was not backed by any concrete evidence. The CIT(A) relied on the judgment of the Gujarat High Court in the case of Patel Chemical Works vs CIT (265 ITR 273), which held that a sale to a sister concern at a price below the market price was a device for tax avoidance.

5. Revenue Neutrality of Alleged Underpricing:
The assessees argued that any addition alleging underpricing to sister concerns should result in a corresponding addition in the purchase cost of the latter, making the whole exercise revenue neutral. The CIT(A) opined that the concept of revenue neutrality could not be applied as all the concerns were doing their business independently and the profit that the assessee would have earned was diverted to units entitled to deduction under section 80HHC of the Act.

6. Acceptance of Trading Results by the Sales Tax Department:
The assessees contended that the trading results filed by them were accepted by the Sales Tax Department, and no addition was made either on the assessee or sister concerns in any of these years. The CIT(A) did not find this argument sufficient to conclude that the transactions were genuine and bonafide.

7. Charging of Interest under Section 244A of the Act:
The AO brought to tax the interest on income tax refund amounting to ?3,84,680/- received by the assessee for the AYs 2006-07 & 2007-08 under section 244A of the Act. The CIT(A) confirmed the AO’s action, stating that the interest on income tax refund is to be taxed in the year of actual receipt, as per the decision of the ITAT, Chennai in the case of DCIT vs. Seshasayee Papers and Bonds Ltd. (2 ITR (Trib.) 417).

Conclusion:
The Tribunal allowed the appeals of the assessees on the grounds of arbitrary addition on sales to sister concerns, failure to establish diversion of profit, allegations of policy to sell below cost, planned device to reduce tax incidence, and revenue neutrality of alleged underpricing. The Tribunal dismissed the appeal regarding the charging of interest under section 244A of the Act, confirming that it should be taxed in the year of actual receipt.

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